Foreign investors are concerned about the sustainability of Nigeria’s budgetary spending pattern, says Razia Khan of Standard Chartered.

She also called on the Central Bank of Nigeria (CBN) to allow a more flexible exchange rate regime where the naira exchange rate moves in response to demand for foreign exchange.

“The budget announced by the senate shows strong rise in spending, but there are concerns about the sustainability of this huge spending”, she said at a media forum in Lagos.

We have seen such huge spending in the past with nothing on ground to show for it; hence investors now doubt the effectiveness of such spending

“The concern is that recurrent expenditure remains high while development expenditure, which would increase the productive capacity of the country is low.

“More worrisome is the fact that most of the spending are based on revenue from oil while non-oil revenue has remain static”, she said

Khan who presented a paper titled “Nigeria and the Super Cycle”, noted that Nigeria is always strongly considered by foreign investors for investment decisions given the size of the country and the potential opportunities for growth, but they are however nervous about the future of the country in view of the spending pattern of government.

Khan who is the Head of Research for Africa, Standard Chartered noted that a major source of concern to foreign investors, which portend serious threat in the future is that non-oil revenue has not been growing, which indicate there is no revenue collection outside crude oil earnings.

She said the budget benchmark of $75 per barrel for crude oil price is also worrisome adding that while there no indication that crude oil prices would fall from the current levels of over $100 per barrel, the budget benchmark is on a very high side and it shows there is no provision for risk of sudden sharp fall in crude oil prices.

She noted that the global economy is going through a super cycle of rising commodity prices which offers countries like Nigeria the opportunity to do the right thing. But the pattern of expenditure in the country is not helpful.

“Crude oil is a non-renewable commodity hence to spend revenue from such commodity on recurrent expenditure, which only leads to a one-off growth in gross domestic economy, instead of spending on developing the productive capacity of the economy through emphasis on capital expenditure, is dangerous”, she said.

“Investors are also nervous about the fact that while crude oil prices have been rising, there have not been commensurate increases in the nation’s external reserves. There are concerns as to why the reserves are not rising and they are not convinced about official explanation of factors responsible for the decline in recent times. They want to see more transparency, they want to know what the risks are”, she said

She said the high level of recurrent expenditure in the budget poses serious threat to the economy. This, she said, leads to huge liquidity in the economy which increases inflationary pressures, weakens the naira and necessitate tight monetary policy which leads to rise in interest rate.

The government she said should take its eye away from oil revenue and pay attention to non-oil revenue and consider how it would sustain the level of recurrent expenditure in the absence of revenue from crude oil.
Concerns over mounting government debt

She said foreign investors are also worried over the increase in the nation’s public debt. “In terms of the ratio of debt to gross domestic product, Nigeria is okay, but the rate at which government is borrowing and what it uses the borrowing to finance poses serious threat to the economy”, she said.

“There is need to check government borrowing now because of its potential risk to the financial markets and the sustainability of the amount of money required to service the debt”, she said.

“In May last year, when the federation accounts allocation funds were delayed yields on FGN bonds rose almost by 500 basis points before coming down when the funds were released. This shows how government borrowing can impact the financial markets, hence there is need to check it now.

Way forward
On the way forward, she said Nigeria needs to right size its government with spending on core responsibilities like health, education and defence rather than spending for spending sake.

In addition she said that the Central Bank of Nigeria (CBN) needs to do more in terms of monetary tightening by more aggressive upward review of the Monetary Policy Rate (MPR) to convince investors it is serious about fighting inflation.

The CBN she said also needs to be more flexible with the exchange rate of the naira. “While we do not agree with the International Monetary Fund (IMF) in terms of a sharp devaluation of the naira, as there is no need for it, we however recommend a ‘crawling peg’ exchange rate regime where the canter of the exchange rate band is allowed to move in response level of demand for foreign exchange.”